Intelligent Investment

Inflation’s Potentially Longer Road Back to Target

Canada Monthly Mortgage Commentary

August 25, 2022 2 Minute Read

Central banks around the world continued their synchronized raising of interest rates and have made it clear they are not stopping until inflation has eased substantially. While headline inflation in Canada and the U.S. cooled ever so slightly in July, it remains well above target. In fact, the Bank of Canada’s preferred “core” inflation metrics, which strip out volatile components, actually increased. Given the central bank’s firm rhetoric on the lengths still left to go to fully tame inflation, expectations are high for another 75 bps interest rate hike by the Bank of Canada early next month. The Federal Reserve, European Central Bank and Bank of England are also expected to follow with large increases of their own in September as well.

The resultant interest rates following these hikes would firmly put both the Canadian and U.S. monetary policies into restrictive territory, where they are expected to start actively slowing economic growth. There have been early indications that higher interest rates and inflation have already weakened demand and slowed economic activity globally. According to S&P Global, U.S. business activity contracted this month to its weakest level since May 2020 along with declines in Asia and Europe. This slowdown combined with some deeply inverted yield curves continue to stoke recession concerns.

While some have speculated that inflation could fall sharply in time for central banks to cut interest rates in 2023 and revitalize economic growth, there is belief that inflation could take longer than expected to get under control. Higher interest rates will ease overall demand and the event-driven spikes across most components of inflation will eventually fade, but the increases in wages and rents tend to be more persistent. As well, the trend of deglobalization will likely be inflationary as supply chains are rebuilt amid higher energy prices and tight labour markets. Overall, such an environment could mean higher bond yields over the medium term.

Economic Highlights:

  • GDP growth was flat in May 2022 with preliminary estimates of a 0.1% gain in June 2022.
  • Employment fell marginally by 30,600 jobs while the unemployment rate holds at its record low of 4.9%.
  • Inflation cooled slightly to 7.6% in July 2022, down from the 8.1% recorded in June.



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